Will taking certain actions to improve my credit score work better than others?
Several credit scoring models are used by the credit unions and, as you can imagine, many of these models are pretty cryptic and closely guarded. However, if you look hard enough, you can find some information. Keeping these models “secret” is an important way that the companies say they maintain the integrity of your score, and, when one model gets “stagnant” or well-known, the companies quickly shift their model. FICO uses several models to a calculate score, and these models often change with the times to more accurately reflect a person’s creditworthiness in the current business climate. Here are some published, FICO percentages about how much certain elements can affect your credit score.
35% Payment History - The most important factor in determining your FICO credit score is your payment history. If you have any accounts in danger of going 30 or 60 days overdue, you should address those immediately. This will ensure that as you begin to improve your credit, it doesn’t get worse while you’re figuring things out. Payment history represents a third of your score, so it should never be overlooked.
30% Debts/Amounts Owed - Your total debt. The lower your debt, the more likely it is that your score will be higher. Debt owed has a major impact on your credit score. While it’s hard to change your payment history overnight, as it’s calculated over several years, it is easy to make a significant impact on your debts owed. Reducing your debt will have an immediate impact towards improving your score. If you’re serious about getting your credit improved, this is where you’ll go out, have a garage sale and put all the proceeds toward debt reduction. There are two factors here that will improve your score. First, your debt owed will be reduced, and your debt utilization score will improve. This is the fastest and easiest way to improve your credit score.
15% Age of Credit History - The longer your credit history, the more likely it is that your score will be higher. Though it’s only 15% of your total score, this is an important area when you’re determining which credit cards you’ll keep and which you’ll get rid of. Keeping credit cards from the accounts you’ve maintained the longest will contribute more to improving your score.
10% New Credit/Inquiries - The number of accounts you have opened recently as well as the number of hard inquiries you have. Every time you apply for a credit card, the issuer does a “hard pull” on your credit. Each time one of these inquiries are made, your score drops slightly. While you’re improving your credit, it is a good idea to stop applying for credit unless you’ve weighed the costs and benefits of a debt consolidation card where you can transfer your existing balances to a new card and thus get credit score benefits in other areas to offset the score reduction caused by the ‘hard pull.”
10% Mix of Accounts, Type of Credit - The more varied your accounts, the more favorable your score. You don’t need many different accounts, but if you’ve got a car payment, a few credit cards, and a school loan, you’re probably doing fine in this area. You don’t want too many accounts, nor do you want too few.
Understanding how the credit reporting companies calculate your score will help you determine where to start when you’re improving your credit to purchase a new home.